Economic growth is a top priority for elected officials around the world. If an economy is growing, companies spend more, people earn more, and everyone feels better off. On the other hand, if an economy is slowing or even contracting, companies scale back operations and people earn less. This is why understanding what drives economic growth has been one of the central questions in the field of economics for nearly two centuries.
The answer to this question lies in productivity. Simply put, economic growth is the result of a greater amount of economic output produced per unit of input—whether it’s labor, capital, or materials. Economic growth can happen through a combination of factors, including investments in education, infrastructure, and research and development. But a country’s ability to produce more economic output is ultimately determined by the efficiency of its institutions, which are the underlying rules that govern the way businesses and people operate.
Growth is often driven by an increase in the stock of capital, such as through savings or investment in property, plant, and equipment. A more rapid rate of capital accumulation is typically associated with higher economic growth than a slower pace. However, there is a limit to how much more capital can be added—and how quickly—without affecting overall economic growth.
In the longer term, economic growth can also be fueled by increasing labor productivity. But achieving this requires a high rate of savings, which can then be invested in improving the quality and quantity of workers’ skills.
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